Burgan Bank K.P.S.C. (BURG) Earnings Call Transcript & Summary

Good afternoon, everyone. This is Elena Sanchez from EFG Hermes, and I would like to welcome you all to Burgan Bank's Full Year 2024 Earnings Call. I would like to hand over the call now to Hamad Al Bader, Manager, Investor Relations, so that we can begin with the presentation. Hamad, please go ahead.

Thank you very much, Elena. Good afternoon, good morning, everyone. Pleasure to meet with you again at our year-end results. Glad to have you all here. Joining from Burgan are Mr. Khalid Al Zouman, our Group Chief Financial Officer; Mr. Gaurav Handa, Assistant General Manager of the Finance Group; Mr. Animesh Aseen, Executive Manager, Strategic Solutions, Sustainability and IR; and myself. We should cover the slides over the next 20 minutes or so, and we would welcome your questions at the end of the presentation upon the summary. Starting with a quick background, 2024 was truly a remarkable year for Burgan. It was filled with significant achievements and transformative moments. We'd like to provide an update on our strong financial performance and key milestones achieved during this year on this call. With that, let me start with Slide #8, which demonstrates our concerted efforts, resulting in strong progress across key strategic pillars and identified focus areas. We continue to pursue out the Kuwait-centric strategy, with focus on building distinctiveness during the year. We renewed our Private Banking and Wealth Management segment under a new motto of Building Trust and Growing Wealth, while revamping the offerings to make it more comprehensive. We have also launched exclusive products and optimized our branch networks for each of our private banking clients. On the retail side of the business, the team has continued to bring positive changes through a major facelift of the existing products and services while also optimizing the branch networks. We continued to deliver strong numbers on the retail side, with average loan volumes increasing 12% year-on-year and deposit base increased around 45% year-on-year, continuing to outperform the market. On the corporate side of the business, we focused on diversification of our book and continued our growth trajectory. We have also focused on streamlining our cross-selling efforts and enhanced our fee-based revenue streams. With that, the cross-sell for our Kuwait franchise improved by around 5% year-on-year. And as a testament of these efforts, the customer satisfaction scores for our key businesses in Kuwait, averaged at 86%, and that was based on an independent third-party survey by IPSOS, one of the leading market research companies. Moving on to the acquisition of UGB, Bahrain as part of our strategic asset reallocation strategy. As we have highlighted in the past, we are really excited about this acquisition. This provides Burgan with an opportunity to tap into key growth sectors or key high-growth sectors of Islamic financing and investments. And the complementary business model of Burgan and UGB along with Kamco would create significant cross-selling, upselling opportunities along with the various integrational synergies. The purchase consideration for the acquisition has been negotiated to around $190 million, which is more or less roughly translated to onetime book of UGB. The initial impact of the deal is expected to be around 60 to 70 bps due to consolidation. However, the exact impact would be determined and disclosed at the final close, meaning the date of the transfer of shares into Burgan's name, which is more or less expected to be completed in March of this year. Moving ahead to digitalization which has been an area of relentless focus for Burgan, some notable achievements here during the year was the appointment of TCS for a complete overhaul and upgrade of our core banking system. This is, I think, monumental deal for Burgan as it's expected to enhance the capacity to launch new products faster, standardized processes and optimized customer journey and achieve significant operational efficiencies. Also another crucial milestone for the whole group was our Turkish award-winning digital platform, ON by BBT, reaching a client base of 1 million within 3 years of launch. It continues to grow leaps and bounds in loan, fund deposit volumes, while continuing its consistent investments in brand awareness alongside launching new products and services. I think apart from the above, we continue to improve our online and mobile applications in Kuwait and in the overall group and subsidiaries. Moving on to our progress on sustainability and the ESG front. We continue to build on the reporting and governance framework. We have established a few years back. We also completed the Materiality Reassessment of our key priorities this year, and we have developed ESG action plans for each business unit accordingly. We are also making steady progress on the integration of climate risk as part of our risk framework. Some key achievements -- or I'd say, what crowned all of this was some achievements during the year. One was achieving the LEED Certification for our Head Office, also partnering with the DHL on their GoGreen initiative, also partnering with Tadwire for waste management and recycling initiatives and also training programs for employees, key executives and various initiatives to further enhance our CSR activities, amongst others. With this update, I will hand over to my colleague, Gaurav, to cover the key financial highlights for the group.

Thank you, Hamad. Good afternoon, everyone. We'll now move to Slide #10 for the performance highlights for 2024. As apparent on this slide, Burgan delivered another strong year of solid performance with all critical KPIs trending in the right direction. In line with our strategy, we continued the momentum of expanding our balance sheet and delivered strong growth metrics for 2024. The group's assets grew by an impressive 10% year-on-year to reach KWD 8.2 billion. Our asset book in Kuwait grew by 8% year-on-year and reached KWD 6.5 billion. Strong progression of our asset base also emerged into noticeable improvement in our top line and bottom line results. The group's revenue reached KWD 229 million, up 3% year-on-year, driven by high net interest income, supported by improved margins. Our cost of credit remained low at near 10 basis points. Consequently, our net income remained robust at KWD 46 million, up 7% year-on-year. In terms of asset quality, our NPL ratio remained low at just 1.8% of our gross loans, marking an improvement of 20 basis points year-on-year. Please do note that NPLs are well provided for and adequately covered. Burgan's capital position continued to remain strong with CET1 of 12.6% and CAR of 18.6%. In light of this positive performance, our Board has proposed a cash dividend of KWD 0.006 per share and bonus shares of 5%. These are subject to shareholders' approval at the AGM. Moving on to the next slide, #12. Our revenue increased 3% year-on-year, driven by higher loan volumes and improved margins. Our net interest income for the year stood at KWD 157 million, up 17% year-on-year. Burgan's operating profit remained marginally below last year due to higher operating costs mainly attributable to staff expenses and continued investment in IT and digital infrastructure. This also explains the slight uptick in our cost-to-income ratio versus last year. Despite the cost pressures, we delivered robust bottom line figure of KWD 46 million, which was 7% higher than previous year. Accordingly, our value to shareholders in terms of EPS also improved by 8% year-on-year. Moving on to next slide, #13, on group's asset quality metrics. During 2024, our NPL ratio improved by 20 basis points year-on-year to a very healthy 1.8% of our gross loans with a strong cash provision coverage of 162%. Provision buffers over ECL requirement were KWD 65 million, which further reassures Burgan's strong coverage profile. Lastly, cost of credit remained very low at just 10 basis points iterating inherent strength in our credit portfolio. Moving on to Slide #14. Burgan's loan book grew by 6% year-on-year to KWD 4.5 billion, predominantly driven by growth demonstrated by our Kuwait franchisee, which saw its loan portfolio grow by 7% year-on-year to reach KWD 3.6 billion. As indicated on the previous slide, the asset quality improvement is also apparent on the loan by stages where year-on-year improvement in Stage 1 and reduction in Stage 3 exposures. In terms of overall asset base, Burgan closed the year with a book of KWD 8.2 billion up 10% year-on-year, while Kuwait asset book stood at KWD 6.5 billion, up 8% year-on-year. Noticeably, 27% of our gross exposures remained in liquid assets. I will now hand over to Mr. Animesh to cover the next few slides.

Thank you, Gaurav. Good afternoon, everyone. Let's now move to Slide #15 to discuss Burgan's liquidity. Burgan's liquidity position remained extremely solid. Our deposit base was robust at KWD 5 billion with a growth of 10% year-over-year. Our deposit mix also remained largely stable with strong CASA levels of close to 31%. Burgan's regulatory loan-to-deposit ratio for the year was very healthy at 81% and well below the regulatory maximum of 90%. Both LCR and NSFR remained very strong at 153% and 116%, respectively, as compared to regulatory minimum of 100%. Moving on to the details of our regulatory capital position on Slide #16. Our CET1 and CAR ratios for 2024 stood at 12.6% and 18.6%, respectively. These levels indicate strong CET1 and CAR buffers of 210 basis points and 460 basis points, respectively, over the required regulatory minimum ratios of 10.5% and 14%, respectively. The current level of capital are extremely solid and gives Burgan enough room to continue its momentum on further expanding its assets book and improve shareholders' returns. Let's now move to the next slide, 17, which provides an aerial view of our -- of the key metrics of our franchises. Emphatically, Kuwait continues to be the largest contributor to the group's asset base, our Kuwait franchise is robust with decent margins, improving cross-sell and strong asset quality metrics in a tough competitive and matured market. As far as our international operations are concerned, all leading indicators remain stable with no major surprises. With this, I will now hand it over to our group CFO, Mr. Khalid, to conclude this presentation.

Thank you. Thank you very much. Now we're moving to Slide #19, which is in summary. As we mentioned earlier, for the year of 2024 was a year where we saw our strategy in action across the horizon, resulting into strong financial performance. That further cemented Burgan's strong market position. Going forward, we expect risk collaborated prudent growth to continue a renewed pace with Kuwait at the front, focus on building asset-light revenue streams, particularly with the acquisition of UGB and Kamco, continued investment on digital and IT infrastructure, continue with our proactive risk management, ensuring low cost of credit. And with that, I will conclude our presentation today, and we'll hand it back to Ms. Elena to coordinate the Q&A sessions.

[Operator Instructions] We will take a question from Chiro Ghosh.

Can you hear me?

Yes, we can.

Yes, yes. So I have 3 very quick questions. So of course, it looks like a good result, primarily. Just a couple of things. First is asset quality appears to have improved quite a bit, especially it seems like there is some recoveries in Turkey. So if you can give some color on it and what would be the kind of provisioning you would be looking at? And purely from asset quality point of view, what would be your outlook next year? Similarly, even the margin in the fourth quarter, again looks good. So is it sustainable? And again, what kind of margin you would be looking for 2025? And quickly, if you can touch on the corporate tax. So what kind of corporate tax you are expecting for 2025? These are my questions.

Yes. So we'll take your questions in the sequence. Asset quality, yes. So we had an improvement of 20 basis points from 2%. We have reduced it to 1.8%. If you remember our previous calls as well, our target was to be below 2%, and we have managed to achieve that. And even for 2025, we -- in our planning, we are assuming that we will be within this levels of 2% at even end of 2025. In terms of recoveries, not just Turkey, there were a couple of recoveries in Kuwait as well. These are from the customers that we had written off years ago. Usually, the legal process takes time. And our legal department was successful in having some decent amount of recoveries this year in Kuwait. And the Turkey revenue recovery drive continues as is as we have been recovering consistently over the last few quarters. In terms of projections for 2025, yes, the cost of credit this year, net of recoveries was just 10 basis points. It's difficult to forecast what would be the cost of credit, but usually, we assume around 30 to 40 basis points credit cost every year when we do our internal planning.

This is a gross level like ex recovery?

Group level, yes.

No, I'm saying is it ex recovery, 30, 40 basis points?

Net of recoveries, yes. In terms of corporate tax, yes, this was announced lately in Kuwait. The executive regulations are still pending. So definitely, this is applicable to we being part of the KIPCO Group. It's applicable to the ultimate holding company. So we will form part of the corporate tax regulations. However, still, it's -- we are internally estimating the impact and we would disclose this in our subsequent calls. I hope I've answered all of your questions.

No, the last one was on the margin. In the fourth quarter, the margin appears to have improved. So, if you can...

Yes. So the major improvement in the margin is coming from our Turkish franchisee. We -- one is their policy rates have increased significantly. Second, the treasurer there has strategically, he's borrowing in dollars and lending in Turkish lira, where they are able to make a good decent amount of spread as rather just having a Turkish lira, Turkish lira book. So they have done the strategic reallocation of funding and lending where we are able to make good margins, and this resulted in a significant improvement in margins in Q4. For full year, we are -- we were at 2.3%. 2025, as of now, our reading is that the Fed is expecting around 2 cuts, but mostly in the second half of 2025. And we think Central Bank might follow just one of them. If there is a -- until first half, we don't expect any compression. But second half, if there is a cut in Central Bank discount rate by 20 basis points, there could be some marginal compression in our margins. But we think we should be in this 2.2%, 2.3% range in 2025 as well.

We will take the next question from Rakesh Tripathi. Rakesh, can you hear me? We can't hear your line.

Elena, we can't hear Rakesh.

Yes, I couldn't hear him either. So we will move on to the next one. Next question from Konstantin Rozantsev.

I wanted to ask a few quick questions on the dollar-denominated Tier 2, which is callable in 2026. So the first one is, should we expect it to be called or not? If you could provide any color on that. If you consider calling it, then should we expect it to be replaced with any other instruments, any other sub or there's no need for the bank as you perceive this to replace this with anything? And lastly, if you consider replacing it with anything, should we -- when should we expect this replacement instrument to be issued?

Yes, you're right. 2026....

Yes, the call is due next year. So the call is expected -- is due next year. And unfortunately, for all of your questions, I'll have to say that due to regulatory compulsions, we cannot answer or provide any guidance. So that decision would be taken closer to the first call date and then it will be accordingly communicated. But it is not allowed for us to give any guidance on this front, unfortunately.

We will take the next question from [ Al-Shakar ].

I have 2 questions. The first one about your NIM sensitivity to the interest rate cuts. So let's say, what's the margin for every 25 basis interest rate cut? And my other question is about other income in the fourth quarter was quite high. So if you can shed some light on the drivers.

So sorry, can you repeat your second question? Your first one was clear. It's about NIM sensitivity to interest rate cuts. But your second question...

Yes. My other question is about the other income in the fourth quarter. It was quite high. So can you tell me if it will be -- what the normalized level for the other income? And what were the drivers in the fourth quarter?

Sure. So we'll start with the first question. So usually, 25 basis cut from Central Bank of Kuwait impacts us negatively by around KWD 2 million to KWD 3 million annually, and which translates to around 4 to 5 basis points on our margins on our NIMs. If the rate cut happens in the second half, the impact is half of this, so 50% of that. So this is the annual impact of 25 basis point cut. On the second question, other income, usually, we had some sale of debt to asset swap that we had recognized earlier in settlement of debts and we realize some gain on those sales, and some income was generated from those assets, which we recognized in Q4. Usually, every year, we have some or the other income -- other income, such kind of incomes, so from certain vehicles, which we have in leasing company in Turkey or some assets that we have recognized, which are held for sale. And usually, it is at these levels. If you look at '23 as well, we made KWD 20 million, and '24, we made KWD 22 million. It's difficult to forecast this, but it's consistent and comes in every year. So we can expect some income in 2025 as well.

We'll try again to take the questions from Rakesh Tripathi. I don't know if you can hear us. Rakesh? All right. I think he has a problem with the line. So we'll move on to the Q&A questions that we have received. One of them is, could you give us any update on mortgage and debt loss? When do you expect these loans to come through? How are you positioned to benefit from the mortgage loan when it comes through?

Yes. So I'll take those questions. So when it comes to the mortgage law, I think we've reiterated during our past calls and even currently, that it's being [ broad ] now. But I think it's currently imminent and very close to being passed. News agencies and I mean, locally, everyone is speaking about the mortgage law and the new edits to it. I think it's still in its final stages, we should expect more or less a resolution and then immediate decree being passed. A lot of parties are going to be involved, not only banks. You're talking about banks, you're talking about developers, you're talking about the credit bank, you're talking -- and will it be directed to the only -- to the list that is within the housing welfare or it's going to be available to everyone? I mean the limit that increased now the initial talks and not to be quoted, but it's around KWD 200,000 to KWD 210,000, a significant increase to the previous limit that was presented. But given now the decision-making and the government is much smoother, and the expectation is that it's very imminent very soon. So hopefully, once the law gets, I mean, gets approved by an immediate decree, then we will shed light more on the opportunity and more on the details of the mortgage law. I think when it comes to the debt law, it's not something very new to Kuwait. We had a debt law before and it stopped back in 2017. But before talking in particular on the debt law, if you see there is a -- starting with the government, there is a big optimism about the government in Kuwait and the direction, the thrust on project spending. And the good thing is that there is an agreement on where to spend money, how to spend it. Project awards have increased significantly. The government through the Minister of Finance repeated multiple times during press conferences, public forums that even if the debt law goes into action, public-private partnerships are very important. And when we say private sector in Kuwait, notably banks are the vital role -- play a vital role within the private sector in Kuwait. And then if we look at the context of financing overall, you're seeing hundreds and hundreds of projects are being -- into the pipeline being passed combined value of more than USD 42 billion, USD 43 billion, and that is included in the draft of the '25, '26 budget, the government's or the country's budget. Some of them have already started as we read them here. So I think there is a true candid movement and approach by the government to boost economic growth. Prime Minister himself urged global companies to open branches in Kuwait, open borders to investments. The direct investment promotion authority has been working relentlessly to open the doors to foreign companies in Kuwait. So I think the debt law is also very close. We're still waiting for the final draft law to pass. But again, if we look back to pre-2017, you know that the law would probably allow government to borrow locally, internationally, including selling bonds. So I think it's an initial phase once the law or the executive law gets passed, I think more details should come into light and then it would be more visible to everyone.

Thank you, Hamad. We'll take the next question on capital buffers, which you have discussed already, but the question is around how -- about the acquisition of UGB, how you plan to boost your capital buffers after the UGB transaction?